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Saudi Arabia: Business As Usual?

A month and a half after Jamal Khashoggi’s brutal murder, Donald Trump has issued a rare formal statementthat attempts, clumsily and mendaciously, to lay his ghost to rest. “The crime against Jamal Khashoggi was a terrible one […] It could very well be that the Crown Prince had knowledge of this tragic event – maybe he did and maybe he didn’t! That being said, we may never know all of the facts surrounding the murder of Mr. Jamal Khashoggi. In any case, our relationship is with the Kingdom of Saudi Arabia”. On the strength of this, the President of the United States proclaims business as usual, citing Saudi collaboration in “our very important fight against Iran” and the fabled $450bnof investment and arms purchasesCrown Prince Muhammad Bin Salman (MBS) supposedly promised when Trump visited Riyadh last year.

Many US and other Western corporations had arrived at the same hard-headed conclusion far earlier. Although a sizeable cohort of business leaders and financiers made headlines by pulling out of the Future Investment Initiative forum that was held in Riyadh just three weeks after the killing of Khashoggi, others – Patrick Pouyanné of Total and SoftBank’s Masayoshi Son among them – obdurately ignored calls to boycott the event, and were rewarded with a public show of gratitude by Energy Minister Khaled Al-Faleh (“Those partners who are here with us today to continue the journey with us are certainly going to look back and find out how the lessons have been learned from the incident but at the same time how committed the kingdom is to its partners that stay the course”). Within days, many of those who had stayed away were backpedalling: while some sent Riyadh discreet apologies for their non-attendance, JPMorgan CEO Jamie Dimon publicly averred that his skipping of the conference “accomplished nothing”. To all intents and purposes, the instinctive response of the overwhelming majority of businesses was to handle the Khashoggi affair in terms of reputational risk management (and, perhaps, government relations), nothing more.

The murder of Jamal Khashoggi has made it brutally clear to international public opinion that the rule of law is a mirage for Saudi citizens with dissenting opinions. This point has been further underlined by reports this week that women’s rights activists detained six months ago on orders from the highest authorities are being subjected to severe physical and psychological abuse. The now infamous Ritz-Carlton shakedown, in which dozens of businessmen, political figures and wealthy princes were detained without charge for over four months and in some cases, according to credible accounts, tortured, suggests that the rule of law does not extend to prominent Saudi businesspeople either. And yet foreign capital appears to operate on the assumption that the rule of law does prevail in Saudi Arabia – indeed this assumption is explicitly voiced surprisingly often. Are foreign investors really in a different category then?

Well, to some extent, yes: Western corporations doing business in Saudi Arabia are generally spared the more egregious exactions that can be meted out to Saudi nationals. On the other hand however, the Saudi government does, for example, have a longstanding habit of allowing its payments to private contractors, both Saudi and foreign, to fall into arrears, sometimes for years on end – in effect levying unconsented, interest-free loans on private sector companies. And seeking redress before the courts, be it for abusive treatment by the state or for harm caused by private individuals or corporations, often turns out to be hazardous affair.

Sharia law, as applied in Saudi Arabia, is largely uncodified and judges are not bound by judicial precedent, with the result that the very content of the law is uncertain. Judges, who are non-specialised and often under-trained yet exorbitantly powerful, observe few formalities and frequently ignore the country’s code of criminal procedure – including its requirement for open proceedings. In light of this, and given the rudimentary nature of domestic ADR procedures, foreign companies frequently stipulate in contracts that dispute resolution should take place in other jurisdictions – but judgments of foreign courts are not consistently enforced by Saudi courts, despite Saudi Arabia’s signature of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In short, their convenient assumptions notwithstanding, foreign investors cannot have full confidence in the rule of law in Saudi Arabia, even in its “thinnest”, most formalistic understanding.

As we recently observed in a Briefing paper for UK specialist monthly The Lawyer (“Arab Gulf States: Out With The Old, In With The New,”), MBS’s much vaunted economic and social reform programme seeks (amongst other things) to address some of these problems. The reform programme’s central objective is to reduce Saudi Arabia’s dependence on oil and diversify its economy by creating an environment that is more propitious for investment, especially foreign investment. And one important aspect of this is implementing reforms that will reassure investor confidence in legal institutions, courts and the rule of law. But in imposing his reform agenda – and his own right to rule, which in Saudi Arabia’s unique succession system is not a given – MBS has run up against powerful vested interests, both within and outside the ruling family. And here we arrive at an uncomfortable paradox: in tackling those vested interests – as must be done if there is to be any progress towards imposing, however partially, the rule of law – he has not hesitated to use methods that show a total disregard for the rule of law.

The Ritz-Carlton internments were a case in point. Their aim was not merely to extort funds from the assembled magnates and princes but also to break resistance to MBS’s clampdown on royals’ systematic non-payment of taxes, extra-legal appropriations of undeveloped state-owned land (so-called ‘white land’) and other ingrained abuses. Theoretically at least, the end was lex, rex – but the means employed, and the message conveyed, were quite the opposite: rex (or rather princeps) lex. Fearing that the slightest democratic ferment could be exploited by his opponents, MBS clearly intends to send a similar chilling message to all other segments of society, and in particular to any potential dissenters or even independent voices, using the usual panoply of state repression – up to and including, it now transpires, extraterritorial and extrajudicial killing and dismemberment.

In our Briefing for The Lawyer, we suggested that MBS’s “wide-ranging programme of reforms […] could make or break the Kingdom”. Readers might have been forgiven for dismissing this as merely a throw-away turn of phrase. But our contention was entirely conscious, and serious: that the contradictions inherent within MBS’s rule carry within them the seeds of political destabilisation the like of which the Kingdom has not seen since at least the siege of Mecca in 1979, and arguably much longer. When the Briefing was being drafted, the question of whether those seeds would grow was perhaps still moot, and we did not develop the point. But there are now distinct signs of germination, amid reports that the Khashoggi killing may have begun to crystallise opposition to MBS within the royal family.

The attitude of Saudi royals to the killing of Khashoggi might be likened to that of Napoleon Bonaparte’s chief of police Joseph Fouché to the abduction and summary execution of the Duc d’Enghien: “It was worse than a crime, it was a blunder”. For the brazen and reckless way in which Jamal Khashoggi was murdered has done immense harm to Saudi Arabia’s international standing. Above all, it has dealt a body-blow to its relations with Riyadh’s key ally, the United States – at a time when the so-called Quincy Pact underlying US-Saudi relations since 1945 has already been structurally weakened by dwindling American reliance on Saudi oil.

The United States’ involvement with the Kingdom has become subject to scrutiny and scorching, bi-partisan criticism in Washington as never before. To be sure, Donald Trump has now very publicly signalled that he for one does not intend to let Khashoggi’s death disrupt the relationship with Riyadh – and is certainly too deeply invested personally in MBS, and vice versa, to contemplate dumping the unruly Crown Prince. But the Senate Foreign Relations Committee has formally called on Trump to launch an investigation into whether MBS is responsible for the murder under the Global Magnitsky Human Rights Accountability Act, and further Congressional action against Riyadh cannot be ruled out. Certainly Riyadh’s ‘123 Agreement’ (the set of conditions that make it legal for the US to sell nuclear technology to another country) no longer looks like the shoo-in it was until recently assumed to be.

Consequently, the Khashoggi case seems to have become a lightning rod for discontent within the ruling family over other aspects of MBS’s behaviour and programme. In the short term, the unseating of the Crown Prince is not the most likely outcome. But with the processes still playing themselves out, what might happen if King Salman were to pass away tomorrow remains an open question.

Saudi Arabia has never been a wholly risk-free environment for foreign investors – at the very least, the Kingdom has always presented a rather particular form of legal risk. Neither should foreign corporations with interests in Saudi Arabia assume that the appropriate reaction to the situation opened up by the Khashoggi murder is merely one of managing reputational risk. Businesses that showed up for the Future Investors forum (and those that preferred to stay away on the day but quietly report for duty the next) are making a wager on the longevity and continued potency of the Crown Prince and his reform programme. But in the period that is now opening up in Saudi Arabia, they will ignore the task of carefully monitoring and evaluating political risk, in its fullest sense, at their peril.